# Microeconomics

Question 1: Answer the following questions � 20 marks

Australia can produce 50 barrels of ethanol or 30 tonnes of wheat a day, while the United States can produce 120 barrels of ethanol or 20 tonnes of wheat a day.

Which country has a comparative advantage in producing ethanol and which country has a comparative advantage in producing wheat? Explain why. (6 marks)

Initially, both Australia and the US spent half a day producing ethanol and half a day producing wheat. However, they now decide to specialise in producing the product that they have a comparative advantage and trade their products in the world market. What are the total gains from trade? Explain. (4 marks)

Demand and Supply

The table sets out the demand and supply schedules for potato chips.

What are the market equilibrium price and quantity? Why? (2 marks)

Suppose a new dip increases the quantity of potato chips that people want to buy by 20 million bags per week at each price. How the demand and/or supply of chips change? Also, explain how the price and quantity of chips change. Show the changes on a graph. (3 marks)

The quantity of potato chips that people want to buy increases by 20 million bags per week at each price. Now suppose, at the same time, a new breed of potato increases production of potato crops and the quantity of potato chips produced increases by 30 million bags a week at each price. Explain how the market equilibrium price and quantity of chips change. What are the new market equilibrium price and quantity? Show the changes on a graph. (5 marks)

Question 2: Answer the following questions � 20 marks

Elasticity of Demand and Supply, and Income

When July�s income increased from \$1500 to \$1800 a week, she increased her demand for concert tickets by 25 per cent and decreased her demand for bus rides by 6 per cent. Calculate July�s income elasticity of demand for (a) concert tickets and (b) bus rides. Show your calculation. Are the concert ticket and bus ride income elastic or inelastic? Is the concert ticket normal good or inferior good to July? Is the bus ride normal good or inferior good to July? Explain. (4 marks)

If a 7 per cent fall in the price of sushi increases the quantity of wasabi demanded by 5 per cent and increases the quantity of sushi demanded by 3 per cent, calculate the price elasticity of demand for sushi and the cross price elasticity of demand for wasabi respect to the price of sushi. Does the elasticity indicate that sushi and wasabi are substitutes or complements? (3 marks)

The price elasticity of demand for domestic banana is �0.50. How much would the price of domestic banana have increased if the demand for domestic banana decreases by 5 per cent? However, this price rise increases the quantity demanded for imported banana by 3 per cent. What is the cross price elasticity of demand for imported banana with respect to the price of domestic banana? Does the elasticity indicate that domestic banana and imported banana are substitutes or complements? (3 marks)

Government Actions in Markets � Production Quotas and Subsidies

The table sets out the demand and supply schedules for rice in Japan.Explain what happens to the price and the marginal cost of rice, if the government sets a production quota of 1,500 bags a week. What happens to consumer surplus and producer surplus? Draw a graph and explain your answers. (5 marks)

Government Actions in Markets � Price floor

The table shows the demand and supply schedules for US wheat market. The US Farm Bill 2012 indicates that the domestic price of wheat will be set at \$300 per tonne, which is above the market equilibrium level of \$250 per tonne, in order to support for domestic wheat growers. At the market equilibrium, 1,000 kilo tonnes (Kt) are supplied. On a graph, explain how the price control in the US would change the consumer surplus, producer surplus, and deadweight loss in the domestic wheat market. In your explanation, compare and show the changes in surpluses and deadweight loss before and after the price control. (5 marks)

Question 3: Answer the following questions � 20 marks

Global Markets in Action � International Trade Restrictions

Import Tariffs

Korea imports a large quantity of beef. With no beef trade, Korea�s equilibrium price for beef was \$8 million per kilo tonne and equilibrium quantity was 450 kilo tonne. If Korea opens its beef market to trade with no tariff, domestic demand would be 750 kilo tonne and domestic supply would be 150 kilo tonne at the world price of \$4 million per kilo tonne. However, Korea currently imposes 35 per cent tariff rate on imported beef. With 35 per cent tariff, Korea�s domestic supply and domestic demand were 300 kilo tonne and 600 kilo tonne respectively in 2015. Assume that intercept of supply curve is \$2 million and demand curve is \$15 million per kilo tonne.

With 35 per cent tariff rate, what would be the price of beef per kilo tonnes in Korea and what would be Korea�s beef import volume? Provide numeric details. (3 marks)

Based on the information given above, draw a graph to show the areas of gains and losses from the trade with 35 per cent tariff rate. Then, calculate the actual value of change in consumer surplus, producer surplus, tariff revenue and the amount of deadweight loss before and after the tariff. Show your calculation. (6 marks)

Import Quotas

France exports cheese to Japan. But Japan imposes import quota on cheese imported from France.

Other things being unchanged, explain how this import quota would influence France�s cheese exports to Japan, consumer price of cheese in France�s domestic market, consumer surplus (CS) and producer surplus (PS) in France. (4 marks)

Producer Choice and Constraints

Terri runs a rose farm. The following table provides information on the number of workers and corresponding output. Complete the table for Terri�s marginal product and average product of labour schedules. Briefly explain how you calculate and show your calculation. (2 marks)

ProPainters hires students at \$250 a week to paint houses. It leases equipment at \$500 a week. The table sets out its total product schedule. Calculate and construct ProPainters� cost schedules � that is, total cost (TC), average fixed cost (AFC), average variable cost (AVC), average total cost (ATC) and marginal cost (MC) per house painted. Briefly explain how you calculate each cost schedule and show your calculation. (5 marks)